Polity by Rob Salmond

Along with the Budget itself, Budget day also gives the public a new peek into how the government thinks the country is going to do over the next few years. These are the Treasury’s forecasts, and they sit beneath every decision the government makes.

As part of this, Treasury has been publishing house price forecasts for the last three years or so. They’re woefully bad, constantly underestimating how high house prices will soar.

The last year where we have real data now is 2014/5 (released today), when house prices rose 11.1%. As late as May 2015, when that fiscal year was already over, Treasury was forecasting house prices or only 6.8%. They were miles out, even after the fact.

For this year and the 2016/7 year, Treasury have had to continualy revise their forecsts up and up and up as we draw nearer.

For the 2015/6 year just ended, Treasury currently thinks house prices rose by 8.9%. A year ago, they thought that number would be 5.2%. A year before that, 4.3%. It’s the same story for the 2016/7 year, with the forecast price rises changing from 2.5% to 3% to 7.7% as we get closer to the time.

So, why does this matter?

Well it matters because of the government's bumbling inaction on the housing crisis. It seems Treasury really is telling the government there’s no housing crisis, via its forecasts, and the government’s all to willing to listen.

Over 2018 to 2020, Treasury forecasts house prices in New Zealand will rise only 0.1% a year faster than general inflation, assuming the government’s current policies continue.

That’s a laughable forecast.

Anyone who believes house prices will stabilize completely, all on their own, while bumbling Nick Smith is still at the helm, needs their head read.

I will happily take a $100 charity donation bet with any blogger or Treasury official who want to stand behind the Treasury’s forecasts on this.

On a similar vein, all Treasury’s projections for the government are also based on an assumption that the global dairy price will skyrocket 55% in the next two years, going from its current rate of USD2,200 a tonne to USD3,400 a tonne. 

Remember the Goldman Sachs report warning of a five year global dairy glut? Treasury’s clearly forgotten.

What ever happened to the small-c conservative accounting convention of being cautious about revenue before it’s real?

Forecasting a 55% increase in the dairy in two years seems almost as rose-tinted as forecasting stable no more skyrocketing house prices.

Ultimately the government’s bad decisions are their responsbility alone, but I do wonder whether there’s a bit of “garbage in, garbage out” going on here, too.

Of the 14% of real GDP growth over the next few years, guess how much your family will see? Less than a fifth of it.

The forecasts in the Budget show the economy will continue to grow. That’s good, even if it is dependent largely on events offshore.

But those same forecasts also show that almost none of that growth will go to families who earn their income through wages and salaries. That’s not good at all.

Over the five year forecast period, that goes from 2015/6 to 2019/20, the government is forecasting the real economy will grow by around 14%.

The government also forecasts that real wages (that is, nominal wage changes minus inflation) of only 2.6% over the same period.

That means only around 17 cents of every new dollar in the economy will go to everyday people who go to work and earn wages and salaries. The other 83 cents go to someone else. To be fair, a little of that will go to people not in work today who get jobs under the forecasts*. But the lion's share will go to speculators, company owners, and other folk from the big end of town.

Only one sixth of the growth in the economy is going to wages and salaries. Are our wage and salary owners really only a sixth of the good stuff that’s going on in New Zealand. I don’t think so.

What people need is a set of leaders who set the economic incentives so that the people who work hard get a fair reward, whether they earn their living through dividends, salary, or wages.

They’re not getting that from this crowd.

* The forecasts of rapidly declining unemployment are repeated by Treasury, even though they've been wrong in years past.

This is the Budget you write when you’ve got no new ideas.

Today Bill English hands down a Budget that says the words “innovation” and “investment” a lot, but contains not one actual innovative investment to meet the housing crisis, the health crunch, or falling standards of education.

And while the economy is forecast to grow, New Zealand’s working people (wage and salary earners like the vast majority of us) are forecast to miss out on most of the gains.

Let’s start with the biggest package in the Budget, the $2.2 billion of new funding for health. Sounds big, right?

Wrong.

First, health is a big ticket item, so the first year’s $670 million is only a 4% increase. Second, that increase gets almost entirely eaten by inflation and population growth, and it’s the biggest increase on offer. The money gets smaller from there, while inflation and population growth carry on trucking. 

In fact, I did the numbers using the Treasury’s own forecasts for health spending, population, and inflation, and found that by 2020 real health spending per person will be about $300 lower (in 2016 dollars) than today. (Nerds: Table at bottom.)

Yes, that’s right, lower.

Even accounting for their much trumpeted $2.2 billion package, you’ll be getting less healthcare than today if National gets its way.

It’s a 10% health cut for every person in New Zealand, over the next four years.

In the media lockup, someone pointed out to Bill English that the proportion of GDP going to healthcare is falling under his watch. Under this Budget, even as he crows about more money for health, it’s forecast to fall from 6.1% of GDP to 5.2% by 2020. English’s response: “Oh well, the amount of money you’re spending isn’t really the issue.”

Then why the hell did he crap on about how much money he’s spending?!

(I guess it’s not much fun playing with smoke and mirrors when the mirrors are so easy to see.)

The other billion dollar package, $2.1 billion on “public infrastructure,” suffers from the same smoke-and-mirrors trickery. Yes, building new classrooms because you have more kids to teach is a good idea, and there’s more money for that – but it’s hardly an innovative investment.

It’s like pausing for a standing ovation each time you pay the power bill.

There’s almost nothing in the budget to address falling educational rankings, and that’s a huge problem for New Zealand down the line.

After that, the second biggest investment in the public infrastructure package is in the “Inland Revenue’s new tax administration system,” which gives you a bit of a clue just how excited the nation’s media were at the Budget lockup just now.

These two non-events are the “highights” in the budget. 

National obviously feels that the current state of New Zealand, where education achievement is going backwards, more people are getting turned away from doctors, and the housing crisis rolls inexorably on is good enough.

I disagree, especially when it comes to housing. And so do most New Zealanders.

The crisis in homeownership gets almost entirely ignored in this Budget, with Nick Smith getting $100 million to buy a few more cemeteries and exploding substations to put houses on.

It’s a case of tinkering while Auckland burns.

Smith promised 500 hectares and got $50 million for this last year, but delivered only 13 hectares and no houses, and spent the whole budget. With double the money, here’s hoping he can do massively better that 26 hectares and no houses. Auckland desperately needs better than this on housing.

The one positive thing I’ll say about the Budget, consistent with my post last week, is that the government is doing good work taking a more data-driven approach to getting the most value for taxpayer funds spent on welfare. My issue isn’t so much with the investment approach – which started its life in ACC under Labour.

My issue is with the investment levels. Declining health resources for each New Zealander is a case in point. As our national income rises, our people deserve access to more healthcare, not less.

Overall, this Budget is deathly dull on the surface, and insidious underneath. There’s nothing major for anyone on any side to get excited about. It’s a sign of a government that’s run out of ideas.

 

Year	Pop'n (000)	Health ($m)	Inflation %	Real health $ per person
2016	4662	15156	0.1	$3,251
2017	4751	15567	1.5	$3,228
2018	4808	15585	2.0	$3,131
2019	4852	15588	1.9	$3,045
2020	4985	15626	2.1	$2,964

Today, media ubiquity Mike Hosking took to nzherald.co.nz to vent his frustration at Labour for suggesting that it would re-convene the same Tax Working Group first used by National. He was clearly very upset.

For Mike, Auckland’s housing crisis is a “so-called social issue,” showing just how closely Hosking empathizes with plummeting home ownership rates. That crisis affects every group other than the richest 10%, as illustrated today by an impressively depressing chart on Stuff:

On some of the other “so-called social issues,” Mike darkly intoned:

If you want to argue that we need to pay more tax to fund more health then you will be paying more tax literally forever, because social issues can be a bottomless hole.

That foreboding is rubbish because we have this thing called democracy. The public always gets to choose – by way of elections – whether it wants to pay any more tax for any more healthcare. Getting a bit more healthcare for a bit more tax today does not, in any sane universe, commit the public to choosing a ton more healthcare for a ton more tax tomorrow.

And then we get to Mike’s coup de maths. Ready? Here he goes:

Given the top rate is 33 cents, and the top rate now kicks in at the average rate in Auckland. And then you add GST on top of that, the majority of your money, in other words more than 50%, is handed over to the government.

Oh boy. Where to begin.

First, Mike’s wrong because a person on the average wage in Auckland pays 33 cents only on the last few dollars of their income, not on all of their money.

In fact, a person on a $78,000 salary (one recent estimate of the average Auckland salary) pays a grand total of 21.2% of that in income tax, not 33%. You need an awful lot of GST to get from there to “the majority of your money.”

Second, even if we grant that when Mike says “the majority of your money,” he actually means “the majority of the last marginal dollar you earn,” he’s still wrong, because he doesn’t know how GST works.

You only pay GST on the money you use to buy things. There are some exceptions, mainly that you don’t pay GST on rent ,mortgage payments, or overseas travel, and you don’t pay GST on your income tax.

So, for our $78,000 person, the last dollar they earn gets taxed at 33%, leaving them $0.67 to buy stuff with. Even if they spend every last bit of that money, and don’t spend even a cent on either rent or a mortgage or going anywhere sunny, their GST bill is $0.67 X 15%, which is a $0.105. Which means the overall tax paid on the last marginal dollar – even in this rare, limiting case – is around $0.43. Quite a bit less than “a majority, meaning over 50%”

The only way Mike could be right here is if GST is magically changed to be chargeable on other taxes, mortgages, rents, and trips.

And third, even if we granted Mike his fantasyland where GST covers every last cent of your income, even when you spend it on tax, mortgages, rent, or Tahiti, then Mike’s still wrong because 33 + 15 isn’t more than 50.

Mike’s claim really is breathtaking in its stupidity. He's implying 21.2% + 10.5% is "over 50%."

These are the kinds of nonsense arguments commentators make when they’re ideologically wedded to the notion that any more public investment by way of tax is always bad.

Mike actually sums his view up quite pithily. He says of Labour: 

It looks like they’ll be arguing for more tax, it’s possible the government will be arguing for less tax.

Politically, I know which side wins that particular debate.

Given Mike's firm view that “arguments for more tax always lose,” I guess he gets pretty confused about whether tax-increasing leaders like Helen Clark, Barack Obama, Tony Blair, Bob Hawke, and so on ever actually got elected.

Perhaps they were all just a bad dream. 

It looks like next week’s budget will feature a lot of talk about the social sector. There’s whispers of big budget boosts in health and education, as well there might be with per-person health spending falling in real terms over the past few years.

My guess is Bill English will wrap a lot of this up with terms like “social investment,” partly as a way of cloaking some poor policy choices with the label of some good policy choices.

The actual “investment approach to social policy” is a good idea, I think. The government does a lot of nerd work to identify people whose lives will really suffer if they’re left, unassisted, languishing on a benefit. Investing more today in these people – through free courses, mentoring, and so on – has the potential to radically improve their lives, and to save the taxpayer money down the line, too. So the government spends more today to help everyone out tomorrow. Good plan.

It’s not a new idea. ACC has been doing this stuff for ages, investing in injury prevention ads and courses and so on. Non-injuries are much cheaper to fix than injuries. From memory, that got a big boost under Helen Clark. What National has done, I think rightly, is extend that approach to welfare.

What it should now do is apply more of the same thinking to health, where up-front investment in population-wide, preventative health programs like healthy living education for kids or quit smoking programs for grown-ups pays off big down the line.

To me, this is the real meaning of “social investment” when it gets bandied about. Certainly last week’s Deloitte / NZIER report on social investment was mainly about this kind of program.

The investment approach isn’t a panacea, of course. And there are always questions to answer. For example: where does the government get the money they need for the up-front investments in helping high-risk people out?

If the money doesn’t come in any way at the expense of other people who rely on public services, fine. 

But if you take funds away from some lower-risk people to fund the extra investments, that’s not good. It isn’t the lower risk person’s fault that they’re lower risk, and they should not be punished because of it. In fact, doing that can create a dangerous “moral hazard” problem, where it becomes in a low risk person’s interest to appear high risk and get extra stuff.

Second, what is the government going to do with the savings it makes? That’s an age-old ideological debate: the right would rather give it away as tax cuts; the left would rather use savings to help more people.

Overall, I like the investment approach. I think the left should embrace it as well. But at the moment the government is working very hard to bring all kinds of other, worse policies under this umbrella, too.

For example, “social bonds” sure sounds like social investment, right? I mean, a bond is a form of investment and everything.

But they’ve got nothing to do with each other.

Social bonds are actually a form of outsourcing, where the government pays some other organization to deliver a particular social outcome, and pays them a bounty if they succeed. Outsourcing has a long, chequered history in social services in New Zealand. See, for example, Serco. The two big problems with it are: 

1. The outside firm has a big incentive to lie to the government about whether it met its goal, and it has a huge information advantage over the government about what’s going on.
2. The firm and the government have a joint incentive to present the public with a rose-tinted view of the outsourcing. The firm’s incentive is obvious. The government’s incentive is to appear competent, look like they’re delivering, and win votes.

Outsourcing for social outcomes risks a situation where firms lie, governments let them lie, and the public loses. It’s not a good idea, whether it’s dressed up as a “social bond” or a “private prison.” Accountability for social outcomes lies with elected officials, and that’s where it should stay.

There are also a set of pilot programmes dotted around the country called the “social sector trials,” trying to find new ways to deliver social services. Some call that social investment, too. But it’s got little to nothing to do with the investment approach. It’s just “some experiments.” I think trying new things is a reasonable idea, so long as you’re doing it properly. And, in this case, there’s evidence emerging that lots of the trials didn’t work.

Most stupidly, government Ministers are constantly talking about their massive multi-billion dollar “investments” in social sector agencies. Again, that’s got nothing at all to do with the investment approach – it’s just another name for “their budgets.” Nice try.

Having said that, I suppose the two things are at least somewhat related: It sure it harder to pull off a per-person “investment approach” when the overall per-person “investment level” is static or falling, as we have been in health and education recently.